Regulatory sway holds the day here in Asia, with Chinese tech stocks leading the losses in Hong Kong, and undoing some of their strong gains. But buybacks won the week.
Despite today's downward move, it has been a strong week for many Chinese techs. They are benefitting in particular from optimism over the largest-ever share buyback from Alibaba Group Holding (BABA) and (HK:9988). Its upsized, jumbo US$25 billion repurchase plan is encouraging investors to consider which companies may be next.
The Hang Seng Tech Index fell 5.0% through Friday's close, dragging the broader Hang Seng Index down 2.5%. In mainland China, the CSI 300 fell 1.8%.
The pessimism stems from a U.S. Securities and Exchange Commission warning that it is "premature" to say there is an imminent deal to guarantee access to Chinese-company audits and accounts. Without such a deal, U.S.-listed Chinese companies would be forced to delist.
The optimism stems from the strong balance sheets of many Chinese tech companies, which they're putting to use with buybacks and dividends. If no one is buying these unloved Chinese tech stocks, the companies might as well buy the stocks themselves!
The smartphone maker Xiaomi (XIACF) and (HK:1810) also announced a major share-buyback plan this week. Xiaomi, which sells more phones around the world than anyone other than Apple (AAPL) and Samsung Electronics (KR:005930), says it will purchase up to HK$10 billion (US$1.3 billion) of its own shares in the open market.
Who's next? Top of mind is Tencent Holdings (TCTZF) and (HK:0700), its 2.6% decline today after disappointing earnings unwinding a "buyback bounce" of 3.1% earlier this week. Asia is ripe for such plans, with strong balance sheets supporting many tech names and protecting them from the higher interest rates that hurt any overleveraged Western rivals.
Nomura has generated a whole portfolio of buyback/dividend candidates, led by Tencent. Other notable names are Samsung, China Mobile (HK:0941), the Taiwanese Apple assembler Foxconn (TW:2354) and carmaker Kia (KR:000270). Toyota Motor (TM) also announced a buyback this week, to the tune of ¥100 billion (US$822 million).
Alibaba says it will buy US$10 billion more of its own beaten-down shares than originally planned. The purchases will come in the next two fiscal years, through March 2024. It's the second time it has increased the size of the plan, having raised the target from US$10 billion to US$15 billion last August. As of this fiscal year, which finishes at the end of March, it has already bought up US$9.2 billion of its own shares, which have been beaten down by two-thirds of their value since an all-time high in October 2020.
Alibaba shares staged another strong rally this week on the back of its buyback announcement, its largest-ever repurchase plan. Alibaba added 20.1% in Hong Kong between Monday's close and noon on Thursday, although it slipped 5.0% today.
It's a refreshing change to see something that a company does in real life driving its stock. How Chinese tech stocks in particular move has, for the last 18 months, been beholden not to fundamentals or operations but oversight from regulators.
The SEC's accounting arm, the Public Company Accounting Oversight Board, this week confirms it is in talks with Chinese regulators over getting access to the Chinese accounts of U.S.-listed companies. Failure to get accounting oversight threatens to force the delisting of all Chinese companies listed on Wall Street under a new law, the Holding Foreign Companies Accountable Act.
Chinese Vice-Premier Liu He sparked a massive rally in U.S.-listed Chinese companies, as I outlined last week, when he told a committee meeting of the Chinese cabinet that regulators in Beijing and Washington have made "positive progress" on talks over the issue, and are "working on forming a specific plan for cooperation."
Liu's comments did sound a little too good to be true, and came out of the blue. Now we hear that there's more "plan" than "specific" in any regulatory cooperation.
There are reports in Asia this week that the China Securities Regulatory Commission, the stock watchdog, is considering allowing the PCAOB access to audit papers if they have been cleared by the Chinese finance ministry for state secrets or sensitive data. The problem is that China construes "state secrets" extremely broadly - basically, anything they don't want you to know - so the amount of redacting could make the access meaningless.
The PCAOB said on Thursday that it's unclear if the Chinese government will give it the kind of audit-supervision access required in the new law, which went into effect in December 2020. It warned that any deal would be a "first step," so it's "premature" to say there's any concrete agreement. The accounting body would still need to investigate if the Chinese are complying.
"If any agreement is reached, we will then proceed with our inspection and investigation activities to determine if the agreement operates as intended," the PCAOB statement says. An "agreement without successful execution will not satisfy U.S. law."
There could also be crosscurrents between different Chinese regulators. One thing Liu stressed is that there have been too many regulatory cooks in the kitchen as China cracked down on Big Tech companies, both at home and with their foreign listings. We'd have the finance ministry needing to clear information so the stock watchdog can report.
Still, the CSRC reportedly started briefing some New York-listed Chinese companies early this month on the need to prepare audit working papers so they can be vetted by the finance ministry.
The U.S. law also requires foreign companies to prove they are not owned or run by a foreign government. This is a big problem. The Chinese Communist Party and its network of state-owned entities have pervasive interests throughout the corporate Chinese hierarchy. The three main Chinese telecoms - China Mobile, China Telecom (HK:0728) and China Unicom (HK:0762) - have already been forced to delist on Wall Street due to the determination that they are partly owned or controlled by the Chinese military.
The U.S. law would force companies to identify by name every board member who is an official in the Chinese Communist Party. The company would also have to say whether there's anything in its charter referring to the CCP, which has written itself into the company bylaws as the ultimate decisionmaker of some companies, superior to the board.
The SEC has also thrown cold water on any warming of relations by adding Chinese microblogging site Weibo (WB) and (HK:9898) to its list of companies that are noncompliant on their accounting. It's a sign that the market sees this as an issue applying to all Chinese stocks that Weibo is still higher for the week, and quickly reclaimed the 4.0% dip on Thursday provoked by its inclusion on the list.
As we can see here in Hong Kong, which was promised autonomy and political freedom through 2047 that's now been stolen away, that the Chinese government has a long history of signing deals that it never intends to keep. Beijing has also not followed through on a number of the concessions agreed when it joined the World Trade Organization in 2001, and has not satisfied the Phase 1 trade deal agreed with the United States in 2020.
Still, any agreement would make the lives of auditors a lot simpler. The U.S. law says foreign companies must provide auditable accounts to the SEC for the year just ended on December 31, 2021. Failure to do so for three consecutive years would result in delisting. So the first delistings could come in 2024, for the annual reports for 2021, 2022 and 2023.
Meanwhile, Chinese law prevents any Chinese accounting company, including the local offices of the Big Four, from sharing audit documents overseas. That was already true in practice, but China made this crystal clear in response to the SEC action with "Article 177," which went into effect in March 2020. This bans Chinese companies from providing information to foreign regulators without approval from the CSRC and the State Council, and bans foreign regulators from conducting investigations in China.
Chinese regulators, which had started the tech rout, say they will take concrete steps to support the Chinese economy. The state-planning National Development and Reform Commission trimmed its "negative list" of industries that are off-limits to foreign investors from 123 to 117. Industries that are not on the list are open to investment without approval.
Providing proper, meaningful access to Chinese audits will be the key step to ensuring that U.S. listings are still viable for Chinese companies. Confirmation couldn't come quickly enough.